Goodwill depreciation from share-based amalgamations remains available for pre-amendment years, while book-profit exempt-income adjustments require independent computation.
Goodwill generated when amalgamation consideration exceeds the net assets acquired qualifies for depreciation for Assessment Year 2018-19 because the Finance Act 2021 exclusion of goodwill from depreciable assets applies prospectively from Assessment Year 2021-22. Where interest-free funds exceed investments, investments are presumed funded from those funds and no interest disallowance arises under Section 14A; the investment-based computation is confined to investments generating exempt income. For book-profit purposes, expenditure relating to exempt income must be independently determined from annual accounts and cannot automatically mirror the normal-tax Section 14A disallowance; the required adjustment remains subject to factual examination.
Issues: (i) Whether depreciation on goodwill arising from amalgamation by issue of shares was allowable for Assessment Year 2018-19 notwithstanding the Finance Act, 2021 amendments; (ii) Whether the additional disallowance under Section 14A of the Income-tax Act, 1961, including interest under Rule 8D(2)(i) and investment-related expenditure under Rule 8D(2)(ii) of the Income-tax Rules, 1962, was sustainable; (iii) Whether the disallowance under Section 14A of the Income-tax Act, 1961 computed under normal provisions could be adopted for adjustment under clause (f) of Explanation 1 to Section 115JB of the Income-tax Act, 1961.
Issue (i): Whether depreciation on goodwill arising from amalgamation by issue of shares was allowable for Assessment Year 2018-19 notwithstanding the Finance Act, 2021 amendments.
Analysis: The excess of consideration paid over the net assets of the amalgamating companies, pursuant to the approved amalgamation scheme, constituted goodwill for purposes of Section 32(1) of the Income-tax Act, 1961. The authorities concerning non-compete rights and amalgamation of a wholly owned subsidiary were factually distinguishable. The statutory amendments excluding goodwill from depreciable assets took effect from Assessment Year 2021-22 and, being substantive, had prospective application.
Conclusion: Depreciation on the goodwill was allowable for Assessment Year 2018-19, in favour of the assessee.
Issue (ii): Whether the additional disallowance under Section 14A of the Income-tax Act, 1961, including interest under Rule 8D(2)(i) and investment-related expenditure under Rule 8D(2)(ii) of the Income-tax Rules, 1962, was sustainable.
Analysis: The interest-free funds available exceeded the investments, giving rise to the presumption that investments were made from such non-interest-bearing funds; no interest disallowance was therefore warranted. For the investment-related component, the average value was to be confined to investments that had actually yielded exempt income rather than all investments.
Conclusion: The additional disallowance under Section 14A was not sustainable, in favour of the assessee.
Issue (iii): Whether the disallowance under Section 14A of the Income-tax Act, 1961 computed under normal provisions could be adopted for adjustment under clause (f) of Explanation 1 to Section 115JB of the Income-tax Act, 1961.
Analysis: The adjustment to book profit for expenditure relating to exempt income requires an independent computation from the annual accounts and cannot mechanically adopt the disallowance computed under Section 14A for normal income-tax assessment. The claim required factual examination at the assessment stage.
Conclusion: The issue was restored for fresh examination in accordance with law, with the adjustment to be independently determined for book-profit purposes.
Final Conclusion: Goodwill depreciation and the Section 14A computation under the normal provisions stand governed by the stated legal principles, while the book-profit adjustment requires an independent determination under Section 115JB.